Mortgage Financing 101: What to Expect Being a Self-Employed Buyer

The number of people that are self-employed has been on the rise. The IRS defines a self-employed person as a business owner or contractor that offers services to other businesses. According to the 2015 employment data published by the US Bureau of Labor Statistics, there were 15 million self-employed individuals in the United States.

When it comes to applying for a mortgage, or any other loan for that matter, self-employed people generally have a harder time as compared to employed persons. The house market collapse that happened in 2008 has led to tightened lending policies making it harder for self-employed persons to prove their creditworthiness.

Applying for a mortgage involves presenting a lot of documents – tax returns, income reports, licenses, etc. All of this can seem overwhelming to most people. The key to making the process of obtaining a mortgage loan easier is to plan ahead and know exactly what is required for getting a home loan.

Here are some of the documents that you need to present for a successful outcome of a mortgage loan application:

1. Tax Return Files

Lenders will most likely ask you to show your last two years of tax return documents. For this, you will need to fill out IRS 4506-T form that grants access to lenders to your tax returns. Lenders will look at the following two tax returns files.

Schedule C — This is used by small business owners and freelancers to file taxes

Schedule E — This document is filed if you receive rental income or royalties on patent etc.

Lenders use the tax returns information to calculate ‘average monthly income’ by taking average of Adjusted Gross Income amount.

2. Documents to Verify Income

Employed persons have it easy when it comes to obtaining a loan. Most often, they only need to provide their pay stub in order to provide proof of their income. Self-employed individuals on the other hand have to present a lot of documents to verify their income.

Consider presenting the following documents, or at least have them ready with you, when you apply for a mortgage loan application:

Business license and permits issued by the country, state, or county

Signed letter from the following agencies:

Enrolled Agent (EA)

Certified Public Accountant (CPA)

Tax Preparer

Letter from a client that includes your contact address, name, reasons, and date for hiring

Apart from the above, you may also be asked for other documents related to the business such as liability insurance, worker compensation insurance, or bond insurance.

3. Profit and Loss Statement

Lenders also look at profit and loss statement of self-employed persons to find out debt-to-income ratio and other information that can help them assess credit worthiness. They will look at both front-end ratio that refers to house-loan-to-income ratio and back-end ratio that refers to ratio income to student loan, credit card debt, car loans, and others.

On a final note, self-employed individuals should be ready to expect a lot of paperwork for obtaining a mortgage loan. They must gather all the documents before applying for a loan to speed-up the loan application process. Also, it is important to focus on improving the factors that lenders will weigh heavily when assessing the application such as debt-to-income ratio, and others to improve the prospect of obtaining a loan.